REAL ESTATE Q&A; : Loss From Rental Condo’s Sale Is Deductible Against Income

Question: My wife and I paid $74,000 for a condo where we lived for four years while stationed at George Air Force Base, near Victorville in San Bernardino County, which closed in 1992. Since then, the condo’s value has plummeted to about $55,000. We owe $64,000.

It is now rented for $650 per month, with a $613 FHA mortgage payment plus $100 condo association fee. I am still in the military. Should I let the mortgage company have the condo rather than pay about $15,000 out of pocket to sell? Are there any special programs for situations like mine when a military base closes and property values decline?

Answer: I am not aware of any special government or FHA mortgage programs for situations like yours. If you let the FHA mortgage go into default, your credit will be ruined. Unfortunately, there’s no easy answer to your question; however, if you sell at a loss, since it is rental property, that ordinary loss is deductible against your other ordinary, taxable income. Please consult your tax advisor before deciding.

Ask Lender About ‘Easy’ Refinance Terms

Q: About four years ago, my former fiancee and I bought a house together with a mortgage at 8 1/2% interest. Two years ago, we split up. I kept the house, and she signed a quitclaim deed to me. However, the mortgage remained in both our names with the understanding that I would refinance when able.

Can she force me to refinance? I don’t want to burn any bridges. For the last two years, I have paid the mortgage from my income as a waiter. But when I applied to refinance, I was told that I don’t earn enough. Should I contact my current lender? How can I get approved?

A: Your former fiancee cannot force you to refinance because she gave up her interest in the house via that quitclaim deed.

My suggestion is to ask your current lender if it has a “streamline,” “low doc” or “easy qualifier” refinance program. Many lenders do.

Assuming you have excellent credit and an on-time payment record with your current lender, you should qualify for an interest rate reduction. It won’t hurt to ask.

Rental House Seller Can Claim Tax Break

Q: Maybe I missed it, but have you written about using that new $250,000/$500,000 home-sale tax exemption on the sale of a rental house? My wife and I are thinking about moving into a luxury rental house we own, living there for two years, and then selling it to take advantage of the $500,000 tax exemption. After selling that house, we would move back into our current residence. What are the pros and cons of doing this?

A: Yes, you can do that. Your rental house must be pretty nice if you expect a $500,000 profit on its sale. Just in case the IRS questions you, be sure you can prove it really was your principal residence for at least an “aggregate” of 24 months during the five years before its sale.

Evidence can include utility bills, voter registration and driver’s and vehicle license transfers. Many rental house owners are doing exactly what you plan to do because the income tax savings are so huge. However, when you move back to your present residence, you cannot use the $250,000/$500,000 home-sale tax exemption for at least 24 months.

No-Pets Policy Doesn’t Cover Seeing-Eye Dog

Q: I ran a newspaper ad for an apartment that I have for rent, and the ad said “no pets.” I received a phone call from a woman who asked about the apartment and if she could have a dog. I said no pets are allowed.

Now I’m being accused of illegal discrimination against the handicapped. It turns out the caller is blind. If she had told me that, I would gladly have allowed her seeing-eye guide dog. My wife is deaf, so I understand what it is to be handicapped. Do you think I did anything wrong?

A: No. You did not illegally discriminate against a disabled person by restating your no-pets policy to the caller. However, if she asked you if a seeing-eye guide dog was all right, you were required to allow it under the Americans With Disabilities Act.

This law requires landlords to make reasonable accommodation for people with disabilities. Even though you have a perfectly legal no-pets policy, making an exception for a guide dog is a required “reasonable accommodation” under the law. Your situation shows how easy it is for misunderstandings to develop.

Bad Credit Could Cause Buyer a Problem

Q: I am on Social Security disability and receive $1,143 per month. My credit is not very good, because of medical problems. I have a VA home loan entitlement that I have never used. Can I buy a house? If so, what price range? Anything you can tell me would be most appreciated.

A: My best advice is, consult an experienced mortgage broker in the community where you want to buy a house or condominium. He or she can give you exact details on the mortgages for which you might qualify. Being on Social Security disability does not disqualify you from obtaining a home loan. Your bad credit record, however, might.

Ownership of Property Is Part of Public Record

Q: I have found a property that has been vacant for several years. How can I find out who owns that property so I can make an offer to buy? I tried a local real estate agent but she was less than helpful. I want to buy this property before someone else does. What should I do?

A: If you have the property’s street address, or assessor’s parcel number, you can check with the county or city tax collector to determine who receives the property tax bills.

While you’re doing that, ask to see if those tax bills have been paid or if they are delinquent. If the tax bills haven’t been paid, that might indicate a distress property situation.

In many cities, you can phone the customer service department of a local title insurance company for the same free information.

Presuming you are a serious potential buyer, ask if the title insurer can give you a “property profile” if you promise to use that firm to buy title insurance when you purchase the property.

Be Wary When Buying Under Land Contract

Q: Two years ago, I gave a friend an $8,000 cash down payment and agreed to take over his $250 monthly payments for his property. He gave me a “security agreement” and included in the papers that I have his power of attorney to sign his name regarding the property. However, he kept the deed.

In February, I told him that I had been paying for two years and that I needed his quitclaim deed. His daughter yelled to him: “Don’t give her any papers, Dad. If she doesn’t pay for it, it becomes yours again.” A lawyer wants $3,000 to take my case.

I have little money. The woman to whom I send the $250 monthly payments hasn’t sent me a receipt for six months, and the last balance seems as if I haven’t paid anything at all. What should I do?

A: It sounds as if you’re buying that property under a land contract, also called a contract for deed, installment land sale contract or agreement for sale. Since your seller holds the legal title, you really hold nothing. A “security agreement” is for personal property, not real property.

Your situation occurs too frequently when buyers make all or the agreed number of monthly payments but are unable to obtain marketable title. I suggest you call the local bar association referral service for the names of several real estate attorneys.

Many lawyers charge a modest fee for the first half-hour interview. You may find one who can straighten out the mess you and the seller created by not properly documenting the transaction. A quiet title lawsuit might be required.

Carrying Back a Loan Has Benefits for Seller

Q: My wife and I have owned a rental condo for about 20 years. We are considering selling it because we are now ages 70 and 80. As it is free and clear, we want to carry back the mortgage for income.

What is the average down payment we should expect? What happens if the buyer defaults on the condo association dues, taxes or our payments? Are interest rates higher or lower than market rates on seller financing?

A: Congratulations on realizing the seller benefits of carrying back the mortgage for your buyer. Easy seller financing usually results in a quick, easy sale for top dollar, especially for a condo.

For your protection, the buyer should make a 10% to 20% cash down payment. Be sure the mortgage specifies that if the buyer defaults on the condo association dues, property taxes or, of course, your monthly payments, that is a default allowing you to foreclose.

My experience in carrying back seller financing has been that I can get at least 0.5% higher interest than for market-rate mortgages. To illustrate, if home loans are at 7.5%, you should get around 8% on your seller-financed mortgage. But don’t argue over the interest rate and lose a profitable sale. For further details, consult a real estate attorney.

Reduce Sales Price to Offset Repair Costs

Q: We thought we sold our home, but the buyer’s inspection report reveals about $3,600 of unexpected repairs needed. Instead of having this work done, can we reduce the sales price instead?

A: Yes. The solution you stated is a common remedy for handling unexpected home-sale repair costs revealed by the buyer’s professional inspection report. The buyer might never have the $3,600 of repairs performed, but that’s his problem, not yours.

Government Must Pay for Condemned Land

Q: I live in a small town where the highway department plans to build a highway bypass. If they take my house by eminent domain condemnation, what happens to my mortgage?

A: If your property is condemned by a government agency by right of eminent domain for a public purpose, such as a new highway, the 5th Amendment of the U.S. Constitution requires that you must be paid the property’s fair market value. The agency will appraise your home and make you an offer.

However, it is in your best interests to hire your own appraiser to determine if the government’s offer is fair.

Eminent domain condemnation offers from government agencies are often low. Don’t be afraid to negotiate. If the government agency won’t increase their payment to what you consider fair, hire an attorney who specializes in eminent domain.

Be sure the attorney’s compensation agreement is based on any increased amount he or she obtains for you above the government’s initial offer.

When the condemnation occurs, your mortgage lender must be paid off from the eminent domain proceeds. However, if only part of your property is taken by the government, you’ll need to negotiate with your lender as to how much of that money should reduce your mortgage. Your real estate attorney can assist you.